An Overview of Liquid Staking Protocols on Polkadot

As more blockchains adopt the Proof of Stake (PoS) mechanism, the demand for liquid staking solutions is on the rise, offering users more flexible staking options. As of September 10, the total value locked (TVL) in the liquid staking market has surpassed $39 billion.

Beyond Ethereum, liquid staking adoption across other public blockchains remains relatively low, signaling ample room for expansion. Certain chains with attractive staking yields are also worth considering, particularly Polkadot. Data from the Polkadot Staking Dashboard reveals that Polkadot (DOT) currently boasts a staking ratio of 58.98%, with an annualized yield of 16.7% (14.81% after commission).

Polkadot’s staking rewards are derived from inflationary issuance, with DOT tokens minted annually. This high inflation rate poses a disadvantage for token holders who do not stake their assets. Presently, Polkadot has an annual inflation rate of 10%. Moreover, since native DOT staking involves a 28-day unbonding period, the growing interest in liquid staking solutions is understandable.

Liquid staking enables users to deposit native tokens (e.g., DOT) into a liquid staking protocol, receiving liquid staking tokens (LSTs) in return. These LSTs accumulate rewards and can be traded back into native tokens like DOT at any time, offering both liquidity and yield.

Polkadot has seen the rise of several liquid staking projects. This article will focus on Bifrost, Acala, and Stellaswap, analyzing these three Polkadot-based liquid staking protocols in terms of redemption mechanisms, node selection, slash protection measures, and DeFi integration.

Bifrost

Bifrost is a liquid staking appchain tailored for all blockchains, utilizing decentralized cross-chain interoperability to empower users to earn staking rewards and DeFi yields with flexibility, liquidity, and high security across multiple chains.

As the largest DOT liquid staking protocol to date, Bifrost boasts more than 8.5 million DOT staked. Its liquid staking token, vDOT, commands over 60% of the market share, positioning Bifrost as the undisputed leader in Polkadot’s liquid staking ecosystem.

Redemption Mechanism

In contrast to traditional liquid staking products, Bifrost offers two fast-unlock options: the Stable Pool and a matching mechanism (peer-to-peer matching).

• Stable Pool Swap: Bifrost’s vDOT-DOT stable pool allows for real-time swaps between vDOT and DOT. This model, inspired by Curve’s stablecoin swap, ensures minimal slippage and price stability, even for large-scale trading volume.
• Matching Mechanism: When users enter a queue to redeem vDOT, the system automatically matches them with other users looking to mint vTokens. For instance, if you submit a request to unlock 100 vDOT but no DOT is available at that moment, and 2 hours later, another user deposits 2,000 DOT, the Bifrost system will allocate a portion of this new deposit to meet your unlock request. This process eliminates the unstaking time, significantly improving liquidity.

Node Selection and Slash Protection

Bifrost protocol operates entirely in a decentralized way, eliminating custodial risks. It also employs an algorithm that automatically filters and selects reliable, diversified validators to reduce centralization risks within the Polkadot network.

Moreover, Bifrost offers Slash protection via the BNC Treasury. In case of a Slash event, the treasury covers the losses first, ensuring that users’ earnings remain unaffected.

DeFi Use Cases

Beyond Bifrost’s native liquidity pools, vDOT can be deployed for mining and liquidity rewards on decentralized exchanges (DEXs) such as Hydration, Stellaswap, Zenlink and Beamswap.

Bifrost has also launched the “Loop Stake” product, a leveraged staking tool for assets within the Polkadot ecosystem. Loop Stake enables users to set and manage leverage levels based on their risk tolerance. Although leveraged staking carries inherent risks, it significantly enhances capital efficiency.

Governance Rights Inheritance

vDOT is the only liquid staking token that retains governance rights, enabling users to participate in OpenGov governance directly with their vDOT. This ensures that governance power remains firmly in the hands of staking users, embodying Bifrost’s commitment to neutrality in governance.

Acala

Acala is one of the Largest polkadot staking platform and positioned itself as the DeFi hub of Polkadot and was the first blockchain to introduce liquid staking for Polkadot network. Its wide-ranging services include the over-collateralized stablecoin aUSD, an automated market maker (AMM)-based DEX, and the liquid staking token LDOT. All of these products and assets seamlessly integrate with other parachains in the Polkadot ecosystem and DApps built on Acala’s EVM+ platform.

Redemption Mechanism

LDOT functions as a native LST within the Acala network. When users stake DOT through Acala’s Staking module, the protocol mints LDOT in equivalent value, based on the real-time exchange rate, and credits it to the user. Users can redeem their LDOT for DOT at any time.

Normally, converting LDOT back into DOT requires a 28-day waiting period. However, to ensure more flexible and immediate liquidity, Acala holds a reserve of DOT that isn’t staked on-chain, allowing users to exchange LDOT for DOT instantly. A 1% fee applies to fast redemptions, and the fast redemption queue is not visible to users.

Node Selection and Slash Protection

Acala’s staking validators are selected through a joint decision by the Liquid Staking Council. LDOT, as the governance token of the Acala Liquid Staking Council, allows holders to vote on validator selections for the staking pool. This can create a positive feedback loop, though it also opens the possibility of validator bribery.

Acala has outlined six criteria for selecting staking validators, one of which is particularly noteworthy: if a Slash event occurs, the validator must bear the losses independently. As a result, staking users do not need to worry about Slash risks from validator downtime, as partner validators are fully responsible for covering any losses.

DeFi Use Cases

As a native asset on the Acala network, LDOT can be used as collateral for borrowing the stablecoin aUSD. Users can stake LDOT to borrow aUSD, giving them access to liquid funds.

Acala’s DEX has also launched an LDOT-aUSD trading pool and an LP incentive pool. Users can add liquidity to the LDOT-aUSD pool and earn ACA rewards provided by Acala.

StellaSwap

StellaSwap is among the first automated market makers (AMM) and decentralized exchanges (DEX) on the Moonbeam network. Its primary aim is to build broader network effects to address the liquidity challenges facing the DeFi sector.

Following the discontinuation of Lido’s stDOT, the StellaSwap team took over its operations. Currently, stDOT can only be acquired by staking DOT.xc on Moonbeam. Users can connect via Metamask or any EVM-compatible wallet, but it is not directly compatible with Polkadot’s native chain or parachains. To stake, DOT assets must be transferred to Moonbeam using XCM.

Redemption Mechanism

Redeeming stDOT for DOT.xc directly on StellaSwap involves a 28-day unbonding period. Alternatively, users can exchange stDOT for DOT.xc instantly through StellaSwap’s Pulsar V3 liquidity pool, but this comes with the risk of stDOT trading below its intrinsic value, preventing arbitrage opportunities and risk-free liquidity provision.

Node Selection and Slash Protection

stDOT’s nomination strategy is optimized to select the top validators in the ecosystem to maintain a stable APR. According to StellaSwap’s official documentation, the validator selection is based on six key factors: Era Points, APR, the amount staked, the list of nominators, any Slash events, and payout rates. However, a detailed list of validators is not publicly available.

DeFi Use Cases

As a DEX, StellaSwap offers a DOT-stDOT liquidity mining pool, with the current APR hovering around 43%. However, since stDOT is only active on the Moonbeam chain, its use cases are somewhat limited.

Conclusion

At present, a staggering 874 million DOT tokens are staked on Polkadot, with a staking rate of 58.66%. Yet, only 1.7% of that amount comes from liquid staking platforms, while Ethereum’s liquid staking penetration rate surpasses 30%. This signals substantial growth opportunities for liquid staking tokens (LST) within the Polkadot ecosystem.

After evaluating these three liquid staking platforms, my top recommendation is Bifrost. This is due not only to its lower redemption fees and the ability to retain governance voting rights but also, most importantly, to its fast unlocking mechanism.

Additionally, since Acala and Stellaswap are involved in various other DeFi activities, their attention may be split between different operations. Bifrost, with its exclusive focus on liquid staking, demonstrates a more concentrated effort on both its technical infrastructure and commercial strategy.